JPY: Guided by the central bank forces – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that the JPY has been the poorest performing G10 currency in Q2 which gives credence to the view that Kuroda’s policy of allowing other central banks to go first in signalling a will to normalise policy has increased the impact of the BoJ’s loose policy settings. 

Key Quotes

“At the end of last year the market viewed the Fed as the only central bank likely to tighten policy over the next year or so. In Q1 a debate emerged regarding when the ECB could taper QE and this has more recently being joined by speculation that the BoE and the BoC could be persuaded to hike rates in the months ahead.  Any reduction in policy stimulus from the ECB also may provide scope for follow on moves from central banks such as the SNB, DNB and the Riksbank.  However, there is danger that the market has overreacted to talk of less monetary accommodation and this could lead to a correction in the JPY crosses in the coming months.”  

“While Japan’s economic data might be extreme, weak wage growth and subdued core inflationary pressures are typical of many other countries.  Despite a surge in market expectations that the BoC could hike rates as soon as July 12, we would argue that this is unlikely with the trim measure of Canadian core inflation running at just 1.2% y/y in May.  While Eurozone core CPI inflation ticked higher to 1.1% y/y in June, we only see this as providing reason for the ECB to taper its QE policy next year.  We see an ECB rate hike as remaining a long way off.  Speculation regarding a BoE rate hike can be linked to the dive in the value of the pound after last year’s Brexit referendum.  In an environment of falling real wages in the UK, we expect that GBP would have to lurch significantly lower for the Bank to tighten the screws on the consumer by hiking rates.”

“In addition to corrective activity, the other factor that could support the yen is a resurgence of safe haven demand.  Indeed, on a 1 day view, the JPY is the second best performing G10 currency after the NZD.  Central bank tightening fears have created a move out of risky assets including EM currencies which naturally benefits the safe haven yen.  The BoJ’s commitment to its aggressive QE programme will be aimed at offsetting some safe haven demand and soothing any lumps in the road caused by speculation about policy normalisation.  On the assumption that the ECB will taper QE next year, we see scope for EUR/JPY to move towards the 1.33 area on a 12 mth view.  However, we expect USD/JPY to remain mostly within the 109 to 114 trading band in the months with safe haven demand likely proving the greatest guidance for the currency pair.  We expect that the impact of the dovish tone of the BoJ on USD/JPY as likely being offset by declining market confidence in the chances of another Fed hike this year.”

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